Fitch Affirms CSN's Ratings at 'BB+'

July 14, 2014 02:42 PM Eastern Daylight Time

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Long-term foreign and Local currency
Issuer Default Ratings (IDRs) of Companhia Siderurgica Nacional (CSN) at
'BB+' and national scale rating at 'AA(bra)'. The Rating Outlook remains
Negative. A full list of rating actions follows at the end of this
release.

KEY RATING DRIVERS

Strong Business Position

CSN is one of two of the largest flat steel producers in Brazil, with a
solid domestic position. Its market share in products such as tinplate
and galvanized steel in Brazil is 87% and 37%. CSN's Brazilian market
position resulted in a 20% EBITDA margin from its steel division, which
compares well with most of its global peers. The company's solid
position within the Brazilian steel industry is complemented by its
seaborne iron business. CSN exported 21.5 million tons of iron ore
(which includes 60% of Namisa) during 2013, nearly 80% of which went to
Asia. The company continues to seek to expand its iron or export
business. CSN is targeting growth in exports that if successful would
lead to a significant increase in exports by 2017. Fitch's base case
anticipates exports of approximately 40 million tons during 2017. If
CSN's is successful in enhancing its iron ore output, the company's
profitability will improve dramatically. Iron ore accounted for about
49% of the company's BRL5.4 billion of EBITDA during 2013.

Growing Leverage Projected

CSN's net debt/EBITDA ratio rebounded to 3.1x for the LTM ended March
31, 2014 from 3.8x in 2012. The company benefited from import
restrictions on steel in Brazil, as well as a slight improvement in iron
ore prices and a growth in volumes. Combined, these factors led to an
improvement in the company's EBITDA to BRL5.4 billion from BRL4.5
billion. Fitch projects CSN's net leverage will stay relatively flat
during 2014 as higher volumes are being offset by declining iron ore
prices. The company is expected to end 2014 with an FFO adjusted net
leverage ratio of approximately 3.8x and a FFO fixed-charge coverage
ratio of approximately 2.5x. During 2015 and 2016, the company's net
debt/EBITDA ratio should climb to around 3.5x from 3.1x, while its FFO
adjusted net leverage ratio should slightly exceed 4.0x. The growth in
these ratios is due to Fitch's projection of a decline in iron ore
prices to $90 per ton in 2015 and 2016 in its models, as well as heavy
capex by CSN on the growth of its iron ore mines.

Solid Liquidity Position despite Negative Free Cash Flow

CSN has low refinancing risk. As of March 31, 2014 CSN held over BRL10
billion in cash and marketable securities. During the next 12 months CSN
faces BRL3.4 billion of debt amortizations. CSN has generated consistent
negative free cash flow over the years due to heavy investments into its
Iron Ore and Steel divisions and high dividend payments. The company
generated negative free cash flow of BRL1.1 billion for LTM March 31,
2014 and BRL1.9 billion for 2013. Fitch's base case indicates negative
FCF generation of more than BRL 1 billion in both 2014 and 2015 as CSN
continues to invest in its iron ore operations.

Strong Pricing to Continue in 2014

The flood of steel imports into Brazil declined during 2013 with volumes
of 1.9 million metric tons indicating a 43% reduction from 3.4 million
metric tons of steel that were imported during 2012. Historically, the
normalized level has been 2 million tons, while the peak volume for
imported steel was 5.6 million metric tons in 2010. The large reduction
in 2013 was aided by the continued devaluation of the Brazilian Real and
steel tariffs of 12% imposed by the government, that at one point last
year was doubled to 24% temporarily on specific steel products. In 2014,
the tariffs are expected to remain in place. Fitch projects this will
foster a modest growth in EBITDA to around BRL5.6 billion. A key
component of Fitch's forecast is the conservative assumption that iron
ore prices will average $100 per ton in 2014.

RATING SENSITIVITIES

Fitch could downgrade CSN's ratings if its credit metrics and cash flow
generation soften and the company continues to develop its projects at a
pace that will result in its net adjusted debt/EBITDA climbing to higher
than 3.5x and/or its FFO adjusted net leverage ratio exceeding 4.0x
during 2014 and 2015, two years in which capex should exceed BRL2.0
billion per year. A downgrade could also follow deterioration in the
company's comfortable liquidity position.

A ratings upgrade is unlikely in 2014 or 2015. A change in the Rating
Outlook to Stable could occur if the company brings on iron ore capacity
as scheduled and within budget. An upgrade in the longer term would be
contingent upon a reduction in the company's net adjusted debt/EBITDA
ratio to around 2.0x when iron ore prices are in the range of $90 per
ton. An increase in the company's iron ore exports to more than 50
million tons would also be viewed positively.

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